These Dow Components Stand to Gain as Consumers Take on More Loans

These finance companies are staples of the Dow Jones Industrial Average, and recent consumer credit behavior bodes well for their future.

Apr 8, 2014 at 1:00PM
Take The Long View

The big news for the Dow Jones Industrial Average (DJINDICES:^DJI) this week has been the two consecutive trading days of big losses on Friday and Monday. Many pundits and investors have cited this moment as the end of the five-year bull market we've all enjoyed. (The Dow has nudged back into the green as of early Tuesday afternoon.)

I've never been one to time the market, and I refuse to let all this talk of stock corrections, sell-offs, and bear markets make me sing the blues. Instead, let's focus on some positive numbers from the Federal Reserve this week that could signal new gains for certain Dow components.

The consumer is back!
The Federal Reserve reported that consumer credit in February grew faster than expectations, led by very strong growth in nonrevolving loans.

Nonrevolving credit -- that's primarily student loans and auto loans -- grew by $18.9 billion in February. Meanwhile, revolving credit contracted by $2.4 billion as U.S. consumers continued to reduce their dependence on credit cards. 

However, according to Wells Fargo, consumers today are taking on more debt than ever relative to disposable income. In a report released this week, Wells calculated that consumer credit as a percentage of disposable income reached a record high of 24.6% in February.

For the Dow Jones' consumer lenders, this uptick in demand for loans could be great for business, regardless of a bull or bear market.

JPMorgan Chase (NYSE:JPM) is the largest bank in the Dow and the third-largest auto lender in the country. The bank maintained a stable 5% to 6% of its loan portfolio in auto loans to individuals over the past 10 years, though that number has trended upward in the past few quarters.



At first blush, 5.6% of the portfolio may seem small, but this equates to a $41.5 billion portfolio of loans. An increase in this business is core to JPMorgan's traditional foundation in consumer banking, and is indicative of greater lending opportunities to consumers across the board.

Another Dow stalwart, American Express (NYSE:AXP), also stands to gain from a return in consumer credit even though revolving loans contracted in February.

American Express is not a significant player in the auto loan business, but the general increase in consumer credit is a very beneficial macro indicator for future loan growth. Unlike other payment processors such as Visa, American Express maintains a significant portfolio of loans (though noninterest income remains the company's primary business). As consumer credit continues to improve, American Express' core credit card business will benefit alongside its book of outstanding loans. In this case, a rising tide of consumer loans will lift both of American Express' revenue streams.

Sometimes a market pullback is a good thing
Whether the market falls into bear market territory or continues its march to new highs, JPMorgan Chase and American Express will remain strong. Changes in the market are simply changes in how much you have to pay to buy them.

If the market does take a turn for the worse, don't panic. Keep looking for amazing companies with fantastic long-term potential. If you find one, a marketpull back is your chance to buy on a discount.

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Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends American Express and Visa. The Motley Fool owns shares of JPMorgan Chase and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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